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I just found out my Dad has is heavily invested in preferred stocks of big bluechip companies like Microsoft and AT&T, et. al.
He really likes preferred's for the following reasons:
1. Like many folks, he still holds that notion that "stocks are sexy", because at least you have a chance to make some serious money with stocks if you do it right (yeah but most don't end up doing it right...is my own view on that).
2. His preferred's pay high dividends. He's retired and likes the income.
3. In the event of BK/liquidation, he will get paid after corporate debt holders, but before all the common stock holders so there is a measure of supposed safety with preferreds (personally I think that's dubious because after the debt holders are paid I'd imagine usually there's already nothing left over)(in fact my Dad had $25,000 in Enron preferreds and all he got back was $5,000 and it took about 10 years after Enron BK'd to get the money back!)
My Dad is about 70 and retired, on SS. He owns a house worth 1/2 mill (easy) free and clear. No debts. Rest of assets are investment securities, about 40% individual common stocks, 20% individual preferred stocks, 20% indexed fund shares of preferred stocks, 18% bonds and bond funds (no Treasuries whatsoever, mostly utility company bonds), 2% cash.
Once I found this out, I started to get concerned that this is a very, very risky investment strategy. He is not a market insider kind of guy at all. He does some reading about the markets and investments and listens to his stockbrokers' advice (not necessarily always taking it).
If markets really crashed out, my Dad would be hosed. But then again, they crashed real bad in March but now the DOW is back headed for 10,000.
What do you guys think about this? Do the preferred stocks really offer much protection from losses versus common stocks?
Preferred stocks have a number of advantages. I don't think your dad's strategy is necessarily risky. Most of the risk lies in the potential that the company could eat flaming death, in which case he might not get his money back. So the moral of that story is don't buy preferreds of companies that might crater. You get a lot more protection from the solidity of the company than from the type of stock issue, is what I'm saying.
I wonder if he's looked into closed-end bond funds. I greatly prefer those to open-end conventional fixed income funds. You can often buy them at a discount to NAV, resulting in a strong rate of return. And while it's possible one of their several hundred bond holdings might default, they aren't all going to default.
He is 70 and he invests 80% of his assets in stocks? Without more information, to me, it sounds too risky. The general rule of thumb is to invest (100-age)% in stocks.
I support investing in the stock market for long term investing, I just don't like single stocks. There is not enough diversification, which means you are greatly increasing your risk. I would switch to mutual funds with a good long track record, leaving enough in liquid savings for emergencies. You would think after getting burned in the Enron deal, your father would be much more cautious. At the age of 70, you don't want to make serious mistakes with your nest egg. Either way, your dad is in good shape financially. Make sure he has long term care insurance in place.
Seems a little heavy in stocks for age 70. I heard the adage 100-age for stock % as well, but I dont follow it either. I'm back to 80% stocks where I 'should' be at 60%. But I dont think things like GE, MMM, PG, PFE are really high risk.
Preferred stocks are a little different. They're subject to interest rate fluctuations, in addition to market fluctuations. As a result, when interest rates go back up, it will have an effect on the share prices. Maybe not as much as the market recovery itself, but it will have an impact..
Preferred stocks are a little different. They're subject to interest rate fluctuations, in addition to market fluctuations. As a result, when interest rates go back up, it will have an effect on the share prices. Maybe not as much as the market recovery itself, but it will have an impact..
Why are preferred shares subject to interest rate fluctuations?
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